How did Gold track commodities during the Greenback period?

How Gold and commodities evolve one against the other in a paper standard. There is fortunately a precedent which is quite instructive, and this precedent is the Greenback era. There are plenty of interesting statistics. Wesley C. Mitchell provides a context of price fluctuations between commodities and Gold. As we will see, in fact Gold and commodities have move in tandem with the Gold price anticipating the increase in price and being sensitive to political developments.

In the tables below, Mitchell provides a range of commodities price in deciles and measures if the Gold is above or below the median increase in commodities price. Non surprisingly, as a commodity form of money Gold evolves in the middle of the distribution of commodities prices.

As we can see initially, Gold races off faster than commodities, as the range of price by the end of 1862 climbs between the 6th and 8th decile of commodities.

As we can see after a flare up in January 1865, Gold starts to lag commodities for the rest of 1865.

While the Greenback standard is referred as a high inflationary period, in fact it is nothing compared to today´s situation as the government debt to GDP stood at only 50% at the top of the war. Had the war lasted longer though, the currency would probably have been destroyed. It is notable to see the price of Gold contract, however one should know the events related to this lower price of Gold in paper. McCulloch implemented his policy of contraction in 1866.

As one can see, the policy of repaying the debt and contracting the currency made price lower. This type of deflation was not a debt-derangement deflation event, but a reduction of the circulation in order to reward those who had carried the greenback and had suffered dear prices. (How different times! Today, which politician would care about rewarding the savers in paper money, only Volcker cared!). 1873 is marked by a global contraction and the demonetization of Silver, hence cash is getting harder on top of the policy implemented. In fact in 1873, in order to fight a bit the effects of the contraction, more greenback were issued.

The year 1874 is marked by a slight rebound in Gold price from the contraction days of 1873. However the policy of contraction is maintained until 1879, when the Gold is brought back to its initial parity with paper and the convertibility is restored.

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This blog is about economics not viewed with an “agenda”. No political football in this blog, just past examples of situations of deflation, inflation, commodities price records, stocks and bonds situation, political conditions, wars and peace. Also some anecdotal evidence of likely causes and effects, no grand scheme of everything ... Continue reading →